Bloomberg Surveillance TV: June 11, 2024

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg

Trimming since spring.

I know you're still constructive on the stock market. Can you just walk us through where you've been pulling back to a little bit?

Absolutely good? More on, Jonathan.

You look, we still think the market is going to end to year higher. We're still in a bold market. You know, that said we've taken a little bit off the table. We started doing that back in the spring,

What about the election, Russ are you concerned about because what we hear from a lot of people is that it's the bond market, not equities. And that's where the risk is, is that how do you and the team see things?

You know, I think the biggest issue is really the simply the uncertainty that hopefully will resolved once the election is over. You know, in terms of whether or not you're going to get aggressively long or short the market, it's generally been the wrong call.

I think what you go back to or the fundamentals.

Strong growth, inflation has moderated, moderating, albeit not in a straight line. But the reality is investors are likely to deal with some of the uncertain team to run up, and that often causes a little volatility in September and October.

Russ, it strikes me that we're talking about the equity market as a monolith and taking risk exposure as though all of it were exposed to macro risk or any risk whatsoever. How much you just basically hide out in certain cash rich companies, the magnificent two or three or whatever is left, and basically stay away from small caps, stay away from those that are interest rate sensitive, stay away from those that are vulnerable to all these risks.

So this is a great question, and I do think that the megacap trend again not necessarily just two or three companies, but those companies that are exposed to these longer term secular trends like AI, like internet commerce, like cloud computing, they have further togo.

So that is definitely part of it. And I also agree you were talking to me for about real estate.

One of the best ways to add value this year has been to avoid what I would call rate data. In other words, those segments in the market, whether we're talking about low income consumers and companies that are geared to their spending commercial real estate smaller regional banks.

These are all parts of the market. They're generally going to be more.

Sensitive to the fact that rates have actually grind it higher this year, and one of the things we've done is try to minimize exposure to those segments.

Generally that's worked.

I think you continue to do it given this higher for longer environment.

There's an ax that's developing because people need something to worry about. People being myself as everyone basically says the same thing in terms of crowding into the names that have been just throwing off bucket loads of cash and staying away from some of the more rate sensitive sectors. It's the reason why we've seen the Russell two thousand underperform. At what point do you worry about crowding and the sense that you can't avoid going into these stocks if you.

Want to outperform.

But that leaves the market that much more vulnerable to an idiosyncratic shock hinge to one of these companies.

I think it's a real risk.

Hard to argue that there's not been crowning, but it's been interesting. You know, this is still a narrow market. It's still a market led by a handful of names that you have seen some broadening out good example, utilities. Utilities is generally considered a low beta sector. It can be a very rat sensitive sector having a good year.

Are having a great year.

Now, this is something we didn't see twelve or fifteen or eighteen months ago, but I think it is an example of investors looking beyond two, three, four or five companies and thinking about one of the other beneficiaries of this AI revolution.

Russ I've got to ask, though, if that means the correlation between utilities and the biggest market way on a SMP five hundred goes up, what am I actually owning in the portfolio?

Well, you're still going to have a very big exposure to that mega trend, and that's going to be something along with economic growth and rate data that you're really just going to have to decide how much of that exposure do you want? That said, you know, again, I think the reason that these trains have become crowded. Is that there are multi year trends and the companies that are give to them when we know their names, are doing an amazing job of generating cash flow, and that's

Saw this line from Mike Wilson and more can standing yesterday said bottom line, the data remains mixed, leaving all the major macro outcomes on the table. RUSS is never easy. I always sit here and say that what you guys do is never easy. It's always easy looking back. But what about this moment is more difficult than maybe other moments in the past.

Well, I think I actually would agree with some of the promise would microsine, which is that it's complicated up. Generally, the economy is strong or it's certainly in decent shape. We had more evidence of that last Friday with the main non farm pay report. But there are segments in the market that are under pressure. We've spoken about the lower end consumer. They are feeling the pain of higher rates,

It's likely to moderate in the back half of the year.

But you have to keep thinking about what are the segments of the market that are going to feel pressure because we are in a higher for longer environment where the FED clearly does not have the latitude of the desire to Russian cut rates.

Hi rush Graz to get your thoughts. As always, Buddy Ross costrict there of black Drob. It's on thoughte have maximum group rights in this Consumers feel like they have new phones. When Apple updates it's mobile operating system to the extent it rolls out its AI related efforts in a way that breaks that bond with consumers, that could result in backlash for the company. Tom joined us now for more Tom, I just want to start with that point, in what way would that break its bond with consumers?

If you want, there's two.

Real risks to Apple's brand on Apple Intelligence. One is what I wrote there, which is when you buy an iPhone, you get that new iPhone feeling every fall when they roll out the new mobile operating system.

So if Apple's saying, you know, this, Apple.

Intelligence is really cool, which remains to be seen. If it is, but you need to have an iPhone fifteen pro because the chip on your iPhone fifteen is not adequate to do it, then you do not get that new iPhone feeling every time they upgrade the software, and I think they're breaking a bond with the consumer. The other risk to brand is that they've named it Apple Intelligence. So if for you, Siri as a guide serious kind of been a failure to the extent that my own

Think there's a lot of brain risks for Apple in the move here.

Tom.

This is interesting because we caught it with Dan Ives, and I wish we'd formed a panel with you both a little bit earlier this morning. Dan Ives of wet Bush earlier today was saying, this is it. This is going to be the thing that unlocks that elusive upgrading cycle, that mega upgrading cycle we've been looking for for years now. Dan says it's just around the corner based on what they released yesterday.

Why is he wrong?

He's wrong because I think that artificial intelligence is not ready for prime time. When you think about hallucinations, you think about the many issues that Google's had with barn and then now integrating with Chat GPT, consumers are going to get a lot of bad information.

It may not be have a rock.

Every day, or you know, include the glue when you make the pizza to keep the cheese, the stick. Things that nature and it may be. So I think that I understand why Dan thinks this could be the elusive upgrade cycle, the first major upgrade cycle since five G.

But I'm not convinced that we're there yet.

Tom, just to put a bow on this, basically, we heard from Dan Ives that he will wear a black suit. If they don't get the kind of increase in sales, well, you wear dan ives wardrobe. But if they do see that increase in sales come September, I.

Will wear his most obnoxious, boldest color outfit. We could go Nick's blue and orange, even though I'm a Bulls fan.

Absolutely all right, we.

Will be there for that.

I will wonder just going forward. You said something that I found really compelling, that this is breaking a bond with the consumer. There has been a feeling that if you had an Apple phone, if you had an iPhone, you would be a subject of whatever kind of new advancements were coming out for the phone. Specifically, you think that this is actually going to cause people to turn away from the iPhone?

Is that correct?

Or else just keep their old ones.

I think there's real risk here that the consumer will be less enthralled to continue to buy smartphones from Apple if they don't get that new phone feeling every fall when they upgrade the software. So yeah, I think that's real issue.

Where do they go?

And I guess this is why we saw Samsung kind of trolling Apple yesterday, putting this out adding Apple doesn't make it newer, groundbreaking, welcome to AI, followed by an Apple emoji. This was Samsung's official account putting that out there on social media. Do you think that Samsung wins out here if they introduce something that's more polished, more advanced, and frankly diverges more significantly from what's currently available.

Well, I think Samsung con went out to the extent that a consumer dissatisfied with the Apple experience, either because of Siri or Apple Intelligence or things of that nature, may gravitate to Samsung. So yes, But at the same time, I think that AI issues are kind of industry wide. They're solucinating on sam phones as well. But yeah, I think you might see some switching here if this bond is in fact broken.

It's on.

This relationship with Google is interesting. You're one of the few that's really really digging deep and talking about it. I assume we'll be spending lots of time doing other things and less time on Google Search, and I'm trying to work out if that's sort of good for Apple and bad for Google, or bad for both.

I do think that bad for Google is a fair interpretation of yesterday's news to the extent that they're integrating chat GBT, although they did open it to other large language models, including.

Gemini from Google.

But yeah, I think that the challenge for Google in search is to the extent that Microsoft integrates open AIS technology and to the extent that consumers lean into artificial intelligence to advanced search. Despite the challenges, that could be a real issue.

For Google, not just Google, there is an issue for a lot of apps and app creators that came out. I'm thinking of Grammarly, I'm thinking of some others. There was sort of a list of rip all of these different apps yesterday trending as people took a look at what would be rendered obsolete by some of this technology.

Absolutely.

The number that that set out to me yesterday is that there's only two thousand native apps for the Vision pro So that feels like a low number one year into the product, and I do it reminded.

Me on larger scale of the flashlight app.

So there was a point in time where if you wanted to use your iPhone as a flashlight, you had to get a dedicated app. Now it's a future within iPhone. So yeah, I think there's a lot of risk of irritating the developers here as well.

Tom. Just finally, we'd love your view.

Just to finish up, I want to hear a little bit more from you on Elon Musk and that complain for Melon, what did you actually make of that?

Do you actually think you'll follow through with that?

I do, and so I admit, though I'm only halfway through Isaacson's book on Elon, which I'm enjoying immensely, but I do think.

That Elon, while he may prave drama.

I think there's a lot of validity into his comments. And I worry about the consumer who flip flops between Apple Intelligence and Chat GPT, one that's supposedly privacy protected and then one that's open and.

Doesn't know better.

So I think, you know, there's gonna be a lot of fun stories. The good news is now we have Apple strategy. Now we get to.

See how it works out.

Interesting Tom looking forward to the results. Tom fordy of Maximum Group and I was of Wetburst joined us now for more so, Dan, let's separrite the two stories. The complaint coming from Elon Musk and what was unveiled yesterday. And you were in Coopatino, California. So Dan, tell me how impressed you were by yesterday's release.

I thought it was a historical moment for Apple, because this is really now as much as we can talk about the generative AI. From an enterprise perspective, the consumer AI story is going to go through Apple.

This is significant.

I believe this will be a catalyst to an AI driven super cycle over the next two years.

Dam we started the program by talking about Apple always being late, but better. Can you tell me if this is late and better? It feels late. I just need to understand if it's better.

Yeah, I think we said was exactly great.

It's late, but you have two point two billion iOS devices, so they.

Can be late. But they have an install base.

That's unrival and that's really what they're going after right now. It's going to be on the services side, the modization. I think eventu will be a subscription service. And then this is something if you don't have an iPhone fifteen or later, you're not going to be able to access Apple intelligence.

And I think that that is the key.

The headline here is the long away at operat cycle that we've talked about while on the show is now in front of us.

So let's take it to that little bit. Dan. If we don't see a material uptick in sales, say in September, November, December, and October, are you going to basically retrench some of your bullishness or do you think it could come as as late as next year and it still would be valid.

Yeah.

If that doesn't happen, I'll come into the studio wearing a black sports jacket because I because I believe this is the start of a renaissance of growth. And I think what's important now is that Apple, you know, really unveiling their AI strategy. Of course, Altman there the open AI being significant. I mean this is ultimately most consumers twenty twenty five percent in the world, they will access AI through an Apple device.

Well, if we end up with sales as soon as next week, you'll be wearing the dray of stead. I'm curious about the idea of.

A subscription, sir.

What are people going to be.

Subscribing to Given the fact that right now you've got Apple Music, you have a number of other services, are these going to subscribe to Apple Intelligence?

I think in first it's free and that's the key for any Apple user.

But this is essentially an AI brand in the iPhone and where eventually there's going to go developers that were all there yesterday that I saw they're going to be building hundreds of apps based on this technology stack within the Apple ecosystem, and that's.

Where more and more consumers are going to interact with it.

This is just the start of now this AI party coming to Cupertino. But as much as it's lead to the party, it's still nine pm in this party that I believe goes.

To four or five am.

Side, Dan, can you tell us why you la must doesn't want to attend.

Because Musk had soured greats because ultimately this is what he wanted to do from a tested perspective. Obviously there's a beef with the open Ai going back years, but this is essentially Apple in their castle saying it's our data, it's our customers, you're not gonna have access. But I believe Musk this could be just some stress going to shaold of me this week. He's not gonna ban iPhones in my opinion.

In super super simple terms, can you explain what his complaint actually is?

What's he concerned about.

He's basically concerned about Apple and open ai having access to the data and no one else has access to it, and that what he speaks to would be a broader concern among other tech players because Apple has a castle that no one else has.

They have the devices.

It's one point five billion iPhones worldwide, and they're saying it's me casser not to casta.

So, Danie, you mentioned Musk contesta and some of the issues he's having. Let's stock that nine folds under your comforage, Joe clearly, very very constructive on Apple. Where are you now on Tesla?

Look, I think.

They've gone through a Category five storm, but they're starting to turn the corner.

And in terms.

Of what we see later this week, I think that compact does pass, that does remove and overhang, and then it's all about stabilization in China, FSD and autonomous going forward.

I think right now the rich reward is there positive.

That's why the stock, I believe, is hanging in even though they're going through some tough times from a demand perspective, better days ahead despite what's definitely a white knuckle period for Tesla shareholders.

That's it, dan We talk about the AI super cycle, and that's the reason why Apple is sitting in its castle and creating a party that's going to go to four or five am. But there's a question for Tesla here.

You have Elon Musk.

You said sour grapes about not having this first.

This is what he wanted.

He wanted the castle and reportedly diverting chips from Nvidia from Tesla to some of his other efforts because he has no place to deploy them. Does that concern you at all in terms of Tesla's valuation as a technolology company and that as just a car company.

Yeah, Look, the AI initiatives have to be under Tesla, and I think when Musk made that threat, and this will come out as Cheryl in the meeting as well this.

Week, twenty five percent ownership.

Otherwise he takes AI out of Tesla, it does raise some concerns, but I believe at the end of the day, it's all going to be under the hood of the Tesla ecosystem, and it's with Musk right now. It's a balance, but it's a pivotal time for mus to prove that AI will be under Tesla.

He recommits to being CEO.

No, I believe the next three to five years and I think then we have better days ahead. But right now it's definitely been a turbulent period and he doesn't help that.

Dan on a bigger level, this is the first day of a two day FED meeting, and a lot of people are wondering how long can this continue? Where the AI early starters just basically accumulate all the cash and are the winners, and accumulate all of the investments that we have from a lot of different investment managers, and I leave most people behind. How long can that divergence continue before something's got to give.

Look, I've been the valid now for two weeks, seen twenty tech companies, you know, all front and center in terms of.

The AI revolution.

This is in nineteen ninety five movement, nine ninety nine nine movement.

And what I mean is tech the stronger and gets stronger.

And I don't see any slow down what we're seeing here, what we're seeing in terms of supply chain Asia, And that's why I believe this is a tech boal market that continues to go forward for the next eighteen months. But many they'll be in the right lane forty five miles an hour in the minivan worrying about valuation.

I just think right now, this.

Tech party is gonna be left lane one hundred miles an hour.

I don't see it slowing down.

Joining us now to discuss his TD's Mark McCormick alongside Santante's Stephen Stanley. Jen It's great to catch up with you, Steven. I've got to start with you. We caught up with

That's still my call.

Yeah, Yeah, I think the inflation data are not cooperating, so it's still going to be a while.

How do you think they'll view the labor market data from Friday?

Yeah, I mean I think they've Schirm and Power kind of broke the link a little bit between the labor market and the economy and inflation earlier this year when they suggested that maybe we can have the economy continue to grow and still get inflation down. I think that was a bit of an ill feated shift on his part.

But I think the.

Labor market only comes into play. It feels like if things start to weaken dramatically, and obviously may suggest that that's not happening. So it's back to inflation.

Mat mccomke, I want a sense to you how important is tomorrow morning's pa CPI print.

I think it's important, But I think, as you mentioned, the key thing here is like progress on inflation. I think that's part of the thing is it's a stumbling block. We're not seeing the progress that we need. You're also going to see the FED likely revise up their core PC numbers in terms of the target number they're looking at.

I don't think we're going to see that tomorrow.

So I do think the key here is there's an intersection of volatility that's not pricing the markets, the geopolitics which continues to push on the fiscal side, and the fact.

That the markets aren't really prepared for any of.

Us So do you think Mark that the Fed's could respond to this by doing absolutely nothing, trying to keep things as stable as possible having and otherwise just in terms of the balance a bit more of the dubbsh side of things than Hawk.

Yeah, I think they're going to try to sound neutral. They're not really.

They can't really project anything to the into September or November December. At the moment, they still need to see four inflation reports stilly get to the September meeting. So I think right now the forward guidance and I think markets understand this.

There's not much.

Significance that comes from Ford guidance because we're all data dependent. So as we kind of watch the data come in, if it's a soft month over month, which is maybe a point twenty six, or if it's a hot month over month, which is maybe point two eight, we're talking about decimal points which the FED can't really provide the guidance for the markets to feel very clear about where

All right, well we'll get to the X side in a second. But Stephen, from your vantage point, this extreme volatility, is there a cost to that when it comes to both economics but also just market risk. When we talk about how rapidly some of these yields are swinging, even if the end of the day at the same place.

Well, I think it makes it very difficult as an investor. And the FED certainly doesn't like to cause volatility, so they're going to try to do what they can to give an accurate picture of where they're headed. But the problem is that they're data dependent, and so if the data are volatile back and forth, high and low, then the markets are going to be volatile, and the expectations around the FED are also going to be volatile.

You see, they still believe that financial conditions are tight.

I think they believe that the level of the funds rate is very tight.

Obviously you don't.

What do you think that's based on, Because we had from built down to be former New York Fed President right a great pay somepole in back opinion and said, maybe it's high indefinitely, not high for longer.

Yeah. I think the problem for them is that there are tailwinds that are working against what they're doing with the rate level. One is their own balance sheet strategy, where the balance sheet is still too big and that's a lot of excess liquidity slashing around in the system making financial conditions easier.

And the other one is fiscal.

Policy, which is continuing to stimulate the economy.

The stress that we are saying pocketslf it. We're saying it at small banks. Regional lenders saw that last year, got PINCA this morning warning a more to comp We're seeing certain buildings have some difficulty and get priced that really really stay discounts, particularly here in midsom Manhattan. Another example of that. What do you think that is on the radar for these officials?

Definitely watching it.

I mean I think to some degree the Fed probably looks at the CIRE situation and says, look, this is something we can't really address directly. Because this is a secular change in the demand for commercial real estate after COVID, right, so there's only so much they can do. They can help to smooth the transition, but this is a a change in the valuation of this sector that needs to happen. But I think what they're watching more broadly is are we seeing the effects of high interest rates? And it

The policy rate itself is high.

But as you say, financial conditions generally are not particularly restrictive.

Mark to build on that, I remember a couple of months ago people were looking at property markets around the world to determine which currency to go with. That was actually one of the big risks and potentially indicators of a central bank that would essentially be forced to cut in order to preserve the sanctity of the economy in that region. Do you think that that's still applicable.

Yeah, that's all we track very so we kind of look at the effective mortgage rates and how it's correlated with interest rates and kind of which currencies.

Are the most vulnerable to that.

You could you kind of play the home base here, but it's very clear this is on the Bank of Canada's radar screen, and it's very clear this is something that was on most European currencies radar screen.

Light.

I always find the primary case study with Sweden, which was if you looked at the mortgage rates, the bulk of the mortgages were under one year and.

They were floating.

So Sweden already took the pain medicine and they've already had a massive move in the currency market.

Things are starting to stabilize a little bit.

But that is something that's on I think the radar screen, which is which are the next tiers of countries that are very vulnerable to a housing disruption, and again this is something that's very insulated in something that's resilient for the US at least relative to other currencies, and how you would look at the housing market as an impact.

Now, Stephen, Housing is one thing. Commercial real estate, though, is another. And you are searing, as John mentioned, two hundred billion dollars of maturities coming up within the next twelve twenty four to eighteen months. And there's a question of whether we're accurately pricing the risk that this could cause the FED to respond in a more material way. Should it be I don't want to say contagious that might be too strong, but have sort of trickle out effects.

Well, I think one thing to keep in mind is that I mentioned the balance sheet before. I mean, liquidity is still plentiful, right, so this isn't likely to lead to a broader credit crunch. I think the other issue is, unlike the housing situation fifteen years ago, there's not a ton of leverage spread through the system that hinges on commercial real estate. So I think the risks are very different than they were in the lead up to the

We're going to continue this conversation with mart McCormick a TD. I know you've got to run, so I just wanted to get some details from you novembers when they're going to move first cup, that's you cool? Can we just go to the top plot just quickly tomorrow what's going to look like two or one?

I think it's probably median is probably two. There'll probably been a minority of people with zero or one.

Though, what do you think the forecast directionally are going to look like? Are we revising growth up and inflation up, unemployment high?

What's that look like?

Not much of a change in growth in unemployment, but probably we're going to need to go up on inflation just for what's already happened.

Just a NUTCH higher on CPI. The difference between the Federalserve and the ECB though, is that they do that and they're not cutting interest rates on the same day.

Well, they were pre committed.

So can you imagine can I just finish on that? Can you imagine if the Fed did what the ECP did last week? What do you think that would look like in markets?

Well, so, the Fed historically has tended to have a very high bar for their first move, and the ECB, as you said, kind of locked in that first move early. The Fed has never really behaved that way, so it's hard to say, but yeah, that would have that would have been interesting.

I forgot who wrote the article, but I was someone here at Blimberg that referenced a reverse tree shae. So tree shae for those of you that maybe aren't familiar. Former ECP president did a couple of hikes at.

Precisely the wrong time. I think one was in our way.

Another series of them around twenty eleven around the usone debt crisis, a reverse tree shape big. Ultimately you've cut too soon. That the cuts the mistake this time and not the hike.

Well, we'll see.

I mean, is that really the is why the euro is weakening so much? Probably some other issues, but it's a good question, and it's something that people are going to be asking.

Yes, something will keep asking. Steven. It's good to see you. Thank you.

This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angient politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.